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Monetary and fiscal interactions in open economies

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  • Sutherland, Alan
  • Lombardo, Giovanni

Abstract

A two-country sticky-price model is used to analyse the interactions between fiscal and monetary policy. The role of an 'activist' fiscal policy as a stabilisation tool is considered and a measure of the welfare gains from international fiscal policy cooperation is derived. It is found that welfare gains from fiscal cooperation do exist provided monetary policy is set cooperatively. There are also welfare gains from fiscal policy cooperation in a monetary union. However, it is found that a 'non-activist' fiscal policy can be better than non-cooperative fiscal policy when the international correlation of shocks is strongly negative. And non-cooperative fiscal policy can be better than cooperative fiscal policy if monetary policy is not set cooperatively. JEL Classification: E52, E58, F42

Suggested Citation

  • Sutherland, Alan & Lombardo, Giovanni, 2003. "Monetary and fiscal interactions in open economies," Working Paper Series 289, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003289
    Note: 656519
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    More about this item

    Keywords

    fiscal and monetary policy; fiscal interaction; monetary interaction; open economy; policy coordination;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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